Transcript of "Two Degrees of Innovation—How to seize the opportunities in low-carbon power"

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Two Degrees of Innovationâ€”How to seize the opportunities inlow-carbon powerLetha Tawney, Francisco Almendra, Pablo Torres, and Lutz Weischer KEY POINTSThis paper offers a strategic framework for â€˘ A global transformation of the energy infrastructure is urgently neededpolicymakers seeking to capitalize on the low- to meet the need for modern energy services while avoiding a climatecarbon transition. The first section presents disaster.innovation as a key strategy to achieveeconomic development, energy, and â€˘ There is a large and growing global market for utility-scale, low-environmental goals. The second section carbon power technologies as this transformation begins. Bothexplains why the innovation process is unique developed and emerging economies can benefit from it but competingin the low-carbon power sector and introduces in the global value chain will require explicitly building innovationthe innovation ecosystem approach. The third capacity.section lays out a step-by-step process to â€˘ Innovationâ€”improvements in price and performanceâ€”will close theidentify and capitalize on the enormous gap between low-carbon technologies today and the low-cost, high-potential and emerging opportunities in thissector. The first two sections provide important performance technologies that are needed.foundations to the framework, but can be read â€˘ Innovations include new products, processes, or policies that reduceseparately. costs or improve performance and can happen at any point in a technologys lifecycleâ€”from design through manufacturing through operations and maintenance.World Resources Institute Working Papers contain â€˘ The innovation ecosystem approach captures the complexity,preliminary research, analysis, findings, and uncertainty, and heterogeneity of innovation processes and identifiesrecommendations. They are circulated to stimulate timely the critical services innovators need to thrive. These are the servicesdiscussion and critical feedback and to influence ongoingdebate on emerging issues. Most working papers are policymakers need to focus on when investing in innovation.eventually published in another form and their content may â€˘ The framework provides step-by-step guidance to identify thebe revised. opportunities in the sector and build a robust innovation ecosystem to capture them.Suggested Citation: Tawney, Letha et al. 2011 â€śTwo Degrees ofInnovationâ€”How to seize the opportunities in low-carbon powerâ€ť.WRI Working Paper. World Resources Institute, Washington DC.Available online at http://www.wri.org.September 2011WORLD RESOURCES INSTITUTE â€˘ 10 G Street, NE â€˘ Washington, DC 20002 â€˘ Tel: 202-729-7600 â€˘ Fax: 202-729-7610 â€˘ www.wri.org

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Two Degrees of Innovationâ€”How to seize the opportunities in low-carbon power 3EXECUTIVE SUMMARY related to the one described belowâ€”could be central toWhy Innovate? transformations in buildings, industry, and transportation.The world urgently needs a global transformation of the However, global supply chains and the highly regulated natureenergy infrastructureâ€”the very underpinning of the modern of utility-scale power present unique opportunities foreconomic system. In order to avoid disastrous climate change, innovation-led economic growth.greenhouse gas emissions must be steeply cut in the coming 1years. Simultaneously, 20 percent of the global population Can Innovation Deliver?lacks access to modern energy services to fuel development. 2 Can innovation really deliver a big enough change in the low-Low-carbon technologies exist but are expensive compared to carbon power sector to meet the climate and energy accesshigh-carbon alternatives and face performance challenges like challenges policymakers face? As seen in the Solar Panel Cost 3requiring large quantities of water or land. Innovationâ€” and Area Changes figure below, successful innovations inimprovements in price and performanceâ€”can deliver the cost- materials, production processes, logistics, and other steps incompetitive, high-performance solutions needed to meet the the value chain underpin dramatic changes in cost anddual energy challenges. performance. The figure also highlights how low experts project innovation could drive costs in the future.Low-carbon power is already a large and growing global 4market , and both developed and emerging economies have an Innovation has not always happened at the breakneck paceopportunity to seize the economic growth associated with this seen in the twentieth century, and innovation in energy has 5transition. The framework in this paper is particularly often been painfully slow. Nicholas Stern warns, the cost ofaddressed to decisionmakers in countries or regions who are actions to mitigate climate change â€świll be higher ifstruggling with how to capitalize on the opportunities in innovation in low-carbon technologies is slower than 6utility-scale, low-carbon power. expectedâ€ť. It should not be assumed that innovation would happen fast enough to address the urgent challenges withoutInnovation is central not just to meeting the intertwined energy support from policymakers.access and climate change challenges. The capacity tocontinually innovate is critical to competing effectively in theglobal low-carbon value chainâ€”the activities that develop, Innovation Definitionsmanufacture, install, operate, and integrate low-carbon powertechnologies. Innovation is crucial to reducing the Innovation â€“ a positive change in a process, product, or policyenvironmental and human impacts of scaling up low-carbon that reduces the cost or improves the performance of atechnologies. Finally, innovation is essential to keeping solution. A successful innovation can be large or small and is adopted and used.electricity costs low while meeting these urgent challenges.There is little appetite in any country to raise energy prices, Innovation process â€“ the iterative, interactive process thateither by taxing high-carbon power (or reforming subsidies for combines resources, including information, in new ways tofossil fuels) or subsidizing low-carbon power for a sustained better meet all of the markets requirements. Often this process is also called innovation.7period of time. Innovation ecosystem â€“ the actors who participate in orBy investing in innovation, countries can reduce the cost of support the innovation process and the rules that shape theirmeeting climate and energy access challenges while increasing interactions. Also known as the innovation system.their international competitiveness in this growing sector. Innovation ecosystem functions â€“ the essential services that the participants provide each other in support of the innovationThe power sector is not the only part of the energy process. Effectively delivered functions improve the odds ofinfrastructure that must be wholly transformed to meet the success for an innovation process.climate challenge. Accelerating innovationâ€”and a frameworkWORLD RESOURCES INSTITUTE â€˘ September 2011

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Two Degrees of Innovationâ€”How to seize the opportunities in low-carbon power 4Solar Panel Cost and Area ChangeTo achieve a 50 percent reduction in greenhouse gas emissions by 2050 (compared to 2005 levels) the IEA estimates that 3,155 GWof photovoltaic capacity will be required by 2050, enough to provide 11 percent of global electricity production. Over time,innovations have made reaching this target easier. Innovations like new materials and improved methods of production, includingimprovements through learning-by-doing and finding economies of scale, have made solar photovoltaic cells significantly cheaper andmore efficient between 1982 and 2008. While many factorsâ€”such as commodity pricesâ€”also impact costs, future innovations can 8continue to improve solar cells pushing toward a competitive cost of equipment, estimated to be US$.50/W.What is Innovation? Innovation is often a synonym for innovation process; the wayThe reasons to invest in innovation are compelling, but the a new product or idea was developed and eventually 11term innovation is badly overused and unclear. It is most diffused. The innovation process is putting resources likecommon to think of innovations as things; new cell phones or capabilities, skills, knowledge, or new supplies together in a 12medicines. However, innovations can also be new processes or new way. Often the innovation process in the power sector is 9organizations. Successful innovations are adopted widely represented as a linear process with predictable stages (seeenough that they impact the marketplace. They can be large The Linear Innovation Process figure below). 10and revolutionary or small and incremental. Given thisbreadth of opportunity, many peopleâ€”from regulators to Some power sector innovations do begin with basic science,energy policymakers, from financiers to field techniciansâ€”are and the linear model can be useful for considering issues like 13innovators every day. level of financing risk, but this model also has limits. It doesWORLD RESOURCES INSTITUTE â€˘ September 2011

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Two Degrees of Innovationâ€”How to seize the opportunities in low-carbon power 5not effectively represent how complex, uncertain, and can happen anywhere in the lifecycle of a product, fromheterogeneous innovation processes can be. design, through manufacturing, to operations and 16 maintenance (O&M).â€˘ Innovation processes are complex because the innovator might move back and forth between stages while trying to There have been attempts to articulate models that better meet all the market criteria for a solution. There are many capture these issues (see The Iterative Innovation Process 14 17 feedback loops between the stages. figure below). This model captures the many feedbacks andâ€˘ Uncertainty hounds every step of an innovation process, as a result some of the complexity and uncertainty seen in the from what the final solution will look like to how to reach real world. The more general phase names allow for more 15 it. heterogeneity. The model also represents innovation processesâ€˘ Every innovation process is unique. Some draw on supported by an innovation ecosystem, in which, as discussed science, others on technical know-how, new information below, policymakers are very active participants. about customers, or new suppliers. An innovation processThe Linear Innovation Process18The Iterative Innovation Process19 Innovation Ecosystem Research Development Innovation process Demonstration Market Feedbacks Formation DiffusionWORLD RESOURCES INSTITUTE â€˘ September 2011

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Two Degrees of Innovationâ€”How to seize the opportunities in low-carbon power 6Characteristics of Innovation in the Low-Carbon 22 is always evolving. It focuses on learning and adapting toPower Sector those changing circumstances, and making the best decisions 23 possible with limited information. It incorporates both theLow-carbon power technologies have some characteristics that familiar market failures like underinvestment in research andstrongly shape the innovation process and as a result, the non-market failures like how hard it is to absorb tacitsector. 24 knowledge. Finally, it focuses on what support innovators inâ€˘ Because low-carbon technologies integrate with a very this sector need, and on domestic context, rather than on 25 mature power sector, they are simply providing a prescribing the right way to deliver that support. commodity and as a result are price takers. They cannot charge a premium for the innovations they offer.20â€˘ Very large investments are needed for many innovations The innovation ecosystem supports and unleashes innovators and it can take a long time to reap the benefits of those by providing them with services. To accelerate innovation, to investments.21 This also makes updating designs and experimenting very slow. increase the odds of innovation processes ending in success, itâ€˘ There are diverse sources of new knowledge in the is critical to ensure all of the services or functions are being sector: science, suppliers, customers, and others. Effectively accessing them is critical. delivered. In the context of the low-carbon power sector, theâ€˘ Knowledge is often tacit (learned through experience critical functions that must be healthy and robust are listed rather than through blueprints or scientific articles). Even when it is not tacit, it is often effectively controlled. below. These form the to do list for the policymaker investingâ€˘ There are many opportunities to innovate, as the in innovation. technologies are not yet mature.â€˘ There are few new entrants and a relatively important role for large, global players. New entrants can rapidly Innovation Ecosystem Functions in the Low-Carbon move into the top tier with good strategies. Power Sectorâ€˘ There is a strong geographic clustering of innovators, often near customers. Function DefinitionUnderstanding how innovation shapes this sector is a powerful Creating and Some of the innovations in this sector aretool for the country or region looking for entry points in the sharing new based on scientific discovery, but many findvalue chain. Strategies that take these factors into account are knowledge their source of inspiration in other areas. As amore likely to be successful. result, this function is broadly bringing new knowledge to the sector from all sources. Ensuring that knowledge spreads effectivelyThis more realistic model of innovation in the low-carbon through the sector is also critical.power sector also suggests some key characteristics of the Building Skills in this sector are not easily learned frominnovation process. Many of these point to how difficult and competence books and academic articles, but they arerisky innovation is in this sector. So how do policymakers critical to the innovation process. Similarly, aincrease the odds of more innovation processes ending in basic education is critical but insufficient bysuccess (i.e., widely adopted innovations)? By looking closely itself. As a result, competence buildingâ€”the provisioning of skilled human resourcesâ€”isat the ecosystem that the innovation process happens within fundamental to successful innovationand actively supporting the functions of that ecosystem. The processes.innovation ecosystem is composed of the actors whoparticipate in innovation processes very broadly, and the rules Creating Networks are a fundamental tool for knowledge collaborative dissemination and creating the contactsthat govern how they interact. All countries and regions have networks innovators need to be successful. These caninnovation ecosystems today, some functioning better than be market-based networks, such as withothers. suppliers, but innovators also find mentors and other non-market support in their networks crucial. Networks can be local, regional,This approach powerfully handles the realities of innovation. national, or international in nature.It assumes that change is ever-present and that the ecosystemWORLD RESOURCES INSTITUTE â€˘ September 2011

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Two Degrees of Innovationâ€”How to seize the opportunities in low-carbon power 7Developing Innovation in this sector requires significant Steps to Build a Dynamic Innovation Ecosysteminfrastructure public infrastructure. Because the individual technologies are part of a larger electricity Step 1: Global value chain assessment and positioning system and are often large pieces of infrastructure themselves, successful Purpose: Decide which technologies and segments of the low- innovation activities rely on a significant carbon power value chain will be the targets of innovation. physical infrastructure such as transmission. How: Conduct a landscape assessment of the countryâ€™s orProviding Innovators often need access to capital in regionâ€™s assets and capabilities and map these againstfinance order to realize their solutions, whether they opportunities in the global low-carbon power sector. Use this are a new manufacturing process or a different data to choose focus technologies and value chain segments. wind farm configuration. A range of financial actors with differing appetites for risk â€”public Step 2: Ecosystem analysis or private, domestic or internationalâ€”must participate in order to serve needs throughout Purpose: Determine how well the current innovation the innovation process. ecosystem is delivering each critical function.Establishing An innovation process is more likely to How: Conduct an analysis of innovation ecosystem functionsgovernance succeed when the rules of the game are clear for the technologies and segments of the low-carbon powerand the and consistent. These rules tell the innovator sector selected in step one.regulatory the bounds within which he must work and theenvironment characteristics his solution must include. Step 3: Policymaking, design and implementation Unclear standards add to the uncertainty that already complicates any innovation process. Purpose: Reinforce functional strengths and correct systemic failures in the innovation ecosystem.Creating Policymakers have a strong hand in creatingmarkets the power market and have a wide range of How: Select policy tools appropriate to the local context that tools, from public awareness to mandates to will support the ecosystem functions. government procurement, which can help ensure the ecosystem is creating a market that Step 4: Policy evaluation, learning, and adaptation enables adoption of innovations. Purpose: Monitor the impacts and the effectiveness of the adopted policies and changes in the sector. Make evidence- based adjustments to adapt to a rapidly maturing global sector.Building a Dynamic Innovation EcosystemAs national and regional policymakers build a dynamic How:innovation system, there is a range of policy tools available to â€˘ Evaluate the impact of the policies implemented in step three on the innovation ecosystem functions.promote innovation. For example, policies that invest in â€˘ Evaluate whether innovation is accelerating throughresearch and development (R&D) can induce innovation in improved cost and performance metrics and whether thislow-carbon power generation, as can price mechanisms such is achieving the economic development, energy, andas feed-in tariffs. How should a policymaker make sense of environmental goals. â€˘ Survey changes in the global sector.the pros and cons of competing proposals and choose between â€˘ Update policy packages to adapt to the new situation.them? What analytical tools and methodologies are useful tohelp policymakers build an ecosystem that increases the oddsof success for innovators? This section presents a frameworkto help policymakers build or strengthen a dynamic innovationecosystem in the low-carbon power sector.WORLD RESOURCES INSTITUTE â€˘ September 2011

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Two Degrees of Innovationâ€”How to seize the opportunities in low-carbon power 8STEP 1: Global Value Chain Assessment and The landscape assessment collects the critical information, butPositioning the important conclusion to this step is selecting the targetThe first step is to assess a region or countryâ€™s context and low-carbon power technologies and segments of the valuecapabilities and match that against the opportunities in the chain. In some cases, these choices have already been made,regional or global low-carbon power sector. This landscape such as Indias 2009 decision to invest heavily in solar. In thisassessment helps determine where the country can most case, the landscape assessment can inform how to best achievecompetitively participate in this growing sector. There are the announced goals and future updates of the goals. Goals inmany ways to approach the analysis but below is one way to the low-carbon power sector, in turn, contribute to achievingorganize the inquiry. broader economic development, energy, and environment goals, by narrowing in on the best opportunities for innovation-led economic development.Landscape Assessmentâ€”Areas for Data Collection What to assess Why is this relevant?Context of the country or region Relevant geographic Renewable and fossil fuel resources will significantly influence the way low-carbon features and natural technologies are evaluated. Geographic characteristics may set other important constraints resource endowments such as availability of water or land needed to deploy specific technologies.Underlying characteristics Social aspects, including Social characteristics like prevailing language will influence the way that economic actors social characteristics and interact domestically and internationally. Flexible human capital variables, such as education human capital variables level, will shape the capacity to innovate. Other human capital variables, such as population size and composition, will influence which niches and technologies will be most suitable to pursue. Political system The political environment will shape which policy tools are available to pursue innovation in the characteristics and current low-carbon power sector. Existing political commitments and competing priorities might also political landscape pose restrictions or opportunities. Production structures and Production structures will determine the strength and ability of the domestic economy to output of goods and produce goods and services competitively. servicesCurrent Economic Activity Trade patterns arising from Existing patterns of international trade can reveal important insights about the capabilities the goods and services embodied in the local economy, and about the existing links between local economic agents competitively produced and those located in other countries and regions. This information will be valuable when assessing competitive strengths. Capabilities arising from the Existing capabilities may be useful in the low-carbon power sector. It is valuable to assess how current production and trade the sector can make use of knowledge and human capacity from other developed industries. portfolio Macroeconomic and Both the domestic and international economic environments will strongly influence a sector financial trends that is global by nature, and will shape the inputs and processes available to innovators.WORLD RESOURCES INSTITUTE â€˘ September 2011

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Two Degrees of Innovationâ€”How to seize the opportunities in low-carbon power 9 What to assess Why is this relevant? Current energy provision The way energy is produced, transmitted, and distributed in a country or region has a setup significant impact on how new low-carbon power generation technologies will emerge andEnergy Supply operate. Current and future These potential weaknesses in the energy supply will strongly impact social and political dependence on foreign attitudes toward new policies and technologies to enhance domestic energy security. sources of energy or other Dependence on other countries for oil, coal, or natural gas supplies may incentivize pursuit of bottlenecks domestic energy sources. Current and expected Impacts from high-carbon power, like poor air quality, may help support a switch to low-carbon pressures on natural technologies. However, new low-carbon power technologies may create their own pressures systems from human on natural resources and ecosystems. Climate change may also impact natural resourceConsiderationsEnvironmental activity endowments. Existing or potential Commitments made by public authorities to pursue specific environmental outcomes, or the commitments toward lack thereof, will impact the political will and investment needed to adopt new low-carbon environmental sustainability technologies. Participation in international Involvement in internationally binding commitments, bilateral partnerships, and internationalInternational Cooperation technology cooperation organizations can either restrict or aid international cooperation. Domestic policies may also efforts urge or restrict international cooperation. Availability of international With commitments made by developed countries in the context of the UNFCCC negotiations to climate finance provide significant financial resources and the ongoing reprogramming of overseas development aid toward climate goals, developing countries may have opportunities to access funds to support their innovation ecosystems.Factors related to each technology under consideration Technology characteristics Each technology will have characteristics that make it more or less attractive. A country or region may be better equipped to take part in one technological pathway over another, since innovation is always embedded in existing economic and social contexts. Value chain characteristics The characteristics of the global value chain for each technology (customer base, manufacturing, transportation of goods, etc.) will be important in deciding which technological pathway to pursue and the best way to do so. International competition There are high barriers to entry and very strong international price competition in most energy and interactions technologies. Innovation policy is not made in isolation, but partly in response to policies elsewhere. There may be niches, regional markets, or location-constrained parts of the value chain that do not face the same competitive pressure. Existing relationships with Interaction in an innovation ecosystem also occurs via transactions with investors, suppliers, international investors, customers, and via networking. These relationships will help determine the best technology or innovators, and supply supply chain segment to pursue. Networks can take years to develop, so existing networks chain partners should be highly valued.WORLD RESOURCES INSTITUTE â€˘ September 2011

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Two Degrees of Innovationâ€”How to seize the opportunities in low-carbon power 10STEP 2: Ecosystem Analysis Analyzing Functions in the Innovation EcosystemThe next step is to determine how effectively the innovationecosystem functions are being delivered for the target Function Sample Evaluation Questionstechnologies selected in step one. In this step is it critical to Creating and Are local institutions generating newconsult with stakeholders, particularly the innovators trying to sharing new knowledge or does most knowledge come 26succeed today. This analysis should provide a good knowledge through foreign players? Are government andunderstanding of which functions are working effectively, private sector R&D budgets stagnate or even declining? How is new knowledge shared,which are facing systemic failures, and which could be particularly if it is non-competitive or publicbolstered to amplify their impact on the innovation process. data?The analysis in step one can provide much useful data, butnow that a target technology has been chosen it is possible to Building How flexible is the skilled workforce to adapt to competence this changing sector? Do they have access todelve deeper. The Analyzing Functions in the Innovation the specialized training, either domestically orEcosystem table provides example questions to effectively abroad, needed for these technologies?explore each function. Creating Are there collaborative networks for the flow ofSTEP 3: Policy Making â€“ Design and Implementation collaborative information, products, and services betweenStep two identified systemic failures in innovation ecosystem networks private sector companies, research institutes, academic institutions, and other stakeholders?functions that are impeding innovation. Building on thisanalysis, the next step is to design policy interventions to Developing Are the key infrastructure elements, from roadsensure functions are delivered more effectively. Rather than infrastructure to heavy equipment, from a functioning grid tofocusing on the individual policy tools (as it is impossible to manufacturing facilities, in place to support innovators?make an exhaustive catalogue of options available), theframework provides principles to ensure a maximum impact Providing Can innovators access finance throughout theon the innovation ecosystem. finance innovation process? Is a range of actors participating, each with a different appetite for risk? Do the traditional sources of finance,â€˘ Focus on improving the rate of change in price and such as banks, understand the new sector and performance. Rather than trusting that increased choose to participate in it? deployment of technologies implicitly leads to innovation, policies should explicitly drive lower costs and improved Establishing Do the rules of the game provide space for governance new ideas and approaches? Do they create performance through features like declining subsidies or and the incentives for innovation in this sector or tightening pollution controls. regulatory discourage action? Are they clear and stable,â€˘ Design polices that are context-dependant and locally environment and do they limit the transaction costs of appropriate. The innovation ecosystem approach compliance? Do they appropriately set the environmental and other public requirements explicitly acknowledges that there can be tremendous for new technologies? differences between policy contexts. Best practices can be adapted but policies and strategies cannot be adopted Creating Does a market for these technologies currently wholesale from another context. markets exist domestically? If building an exportâ€˘ Take a functional approach rather than a tool-centric potential is one of the larger goals, how are the markets in the target countries? Are there approach. Many different policy tools can effectively explicit barriers to participating in those improve how well a function works. The goal is not to markets? deploy a tool, like a renewable portfolio standard, because it is a standard policy prescription, but because it will improve the function.WORLD RESOURCES INSTITUTE â€˘ September 2011

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Two Degrees of Innovationâ€”How to seize the opportunities in low-carbon power 11â€˘ Design integrated and interconnected policies. Sample Policy Tools by Ecosystem Function Collaboration with other policymakers will be critical to improving every function at the regional, national, and Function Tools international level. However, large, sweeping packages Creating and Subsidies and incentives for new research may be difficult to implement so smaller, interconnected sharing new contests and prizes, intellectual property improvements can also be pursued. knowledge protection and enforcement measuresâ€˘ Design durable, incremental policies to achieve Building Subsidies and incentives for education and cumulative change. Politics and other factors like competence training, fellowships, scholarships, visas for absorptive capacity may limit the scale of the policy advanced degree candidates changes that are possible. Incremental changes, which can Creating Joining or initiating international cooperation, be more durable despite changing political winds, can be collaborative supporting industry associations, intellectual very important to the ecosystemâ€™s future path, though it is networks property protection and enforcement measures important that these incremental changes are well that provide network participants confidence telegraphed to innovators so they do not increase uncertainty. Developing Public-private partnerships, incentivizing infrastructure private development, planning for publicâ€˘ Design robust but flexible policies. The one certainty in development, investment in public this sector is constant change. Whether from the impacts infrastructure of climate change or the policies of another player in the sector, policies that will work in multiple future scenarios Providing Loan guarantees, â€™greenâ€™ banks, public venture finance capital style funds are more likely to contribute positively to the ecosystem rather than create systemic failures of their own. Establishing Setting standards, setting targets, taxingâ€˘ Design with evaluation and learning in mind. In this governance negative externalities, subsidizing positive iterative process, it is critical to evaluate policies to learn and the externalities, eco-labeling and other voluntary regulatory approaches, tradable permits and adapt. Strategies from small-scale experiments to environment reporting requirements can make this process more successful. Creating Feed-in tariffs, renewable portfolio standards, markets government/public procurement, mediaSTEP 4: Policy Monitoring, Evaluation, Learning, and campaigns, setting government requirements,Adaptation taxing negative externalities, subsidizingAt this point a target technology has been chosen based on a positive externalities, eco-labeling and other voluntary approachescountryâ€™s strengths, resources, and capabilities; theeffectiveness of the ecosystem functions has been evaluated;and policy instruments meant to improve the effectiveness and Evaluation should encompass three levels of analysis:efficiency of the functions have been designed and â€˘ Were the policies successfully implemented and howimplemented. Building a dynamic innovation ecosystem is an did they impact the delivery of ecosystem functions?iterative process so the next step is to evaluate the policies set â€˘ Is the innovation ecosystem successfully acceleratingin step three, scan for changes throughout the global sector, innovation? Are costs declining and performanceand make any changes necessary to adapt to the new improvements emerging?challenges and opportunities. Without continued monitoring â€˘ How is the country or region progressing toward itsand adaptation, new systemic failures can emerge and old ones long-term development goals? For example, is anfester. export industry developing and drawing foreign direct investment?WORLD RESOURCES INSTITUTE â€˘ September 2011

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Two Degrees of Innovationâ€”How to seize the opportunities in low-carbon power 12Given the rapid change in this sector, monitoring the state ofboth the national context as identified in step one and theinnovation ecosystem as identified in step two is critical.While the policies may have been implemented perfectly, thelarger landscape will likely have changed, either blunting oramplifying the policiesâ€™ impact. New opportunities may haveemerged and new competitors evolved.Finally, it is critical to adaptâ€”to change, tune, cancel, orupdate the policies put in place in step threeâ€”to cope with thenew landscape and to incorporate the learning from theevaluation process.ConclusionThe need for innovation in the low-carbon power sector iscritical, both in terms of our challengesâ€”preventingcatastrophic climate change and addressing urgentdevelopment gapsâ€”and in terms of opportunities toparticipate in the economic growth that will go with it.Policymakers need better evidence as they chart a coursethrough this new territory and they need to be able to sharetheir experiences and learn together.In the end, it is likely the global power sector will betransformed through a blend of strategies; increasing the costof high-carbon options or limiting them outright and reducingthe cost of the low-carbon alternatives. The power sector is notthe only one that requires transformative change and there areimportant synergies between it and demand-side changes,distributed supply options, and transportation solutions thatthis analysis misses. In each of these, innovation is key toeffectively using the best technology to meet our challenges.There have been a great many technological revolutions in thelast two hundred years, from agriculture to energy toinformation. Solving the pressing problems of today requireseveryone to live up to their potential as innovators andcontribute to the next revolution.WORLD RESOURCES INSTITUTE â€˘ September 2011

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Two Degrees of Innovationâ€”How to seize the opportunities in low-carbon power 13INTRODUCTION billion. An additional $40â€“45 billion was invested in large 31The world urgently needs a global transformation of the hydropower."energy infrastructureâ€”the very underpinning of the â€˘ "For the first time, investment in renewable energymodern economic system. In order to avoid disastrous companies and utility scale generation and biofuelclimate change, greenhouse gas emissions must be steeply cut projects in developing countries surpassed that in 27 32in the coming years. Simultaneously, 20 percent of the developed economies."global population still lacks access to the modern energy â€˘ "Renewable energy accounted for approximately half of 28services needed to fuel development. Many more lack access the estimated 194 gigawatts (GW) of new electric 33to reliable, affordable modern energy. These intertwined needs capacity added globally during the year."challenge policymakers in both developed and developingcountries. This sector is rapidly growing and the potential for further expansion is substantial. The IEA estimates that the totalThe necessary technologies exist today to move away from investment needed to achieve a 90 percent reduction in thegreenhouse gas emitting energy technologies, particularly in carbon intensity of electricity generation by 2050 (compared 34the power sector. For example, a recent Intergovernmental to 2007 levels) is US$32.8 trillion. Countries, bothPanel on Climate Change (IPCC) report confirmed that the developed and developing, have an opportunity to seize theglobal technical potential for renewable energy is substantially economic growth associated with this transition. 29larger than global energy demand. However, many low-carbon energy technologies are more expensive than their Past waves of innovation, such as the information technologycarbon emitting counterparts. They face performance revolution, have been exported from developed to developingchallenges, like requiring significant water or land. They are countries. This time emerging economies already have somenew to the energy system and create integration headaches. capacity to lead innovation in critical parts of the low-carbonWhile the climate challenge can be met with the tools on hand, power sector and are making truly massive investments in 35 36innovationâ€”improvements in cost and performanceâ€”can both research and development and energy infrastructure.deliver the cost competitive, high performance solutions China is the example most often touted, but others could alsoneeded to meet the dual energy challenges. play important roles. Emerging economies are making these investments because they provide a crucial competitive edge 37The energy transition has begun. Current national in this rapidly moving sector. Securing a place in the globalcommitments to low-carbon power are creating a sizable value chainâ€”the activities that develop, manufacture,global market for utility-scale, low-carbon power install, operate, and integrate low-carbon powertechnologies. Governments are moving from pledges to technologiesâ€”will require explicitly investing inaction, implementing their international and domestic innovation.commitments under the umbrella of low emissionsdevelopment strategies and green growth. In most models of a low-carbon future, such as those done by the International Energy Agency (IEA), innovation is 38â€˘ In 2010 investment in renewable energy generating assumed to occur and to reduce costs over time. There capacity (including large hydro) was greater than fossil- has been less focus on how to ensure this innovation takes 30 fuel investment. place. What is the appropriate role of the policymaker? Willâ€˘ "Total investment in renewable energy reached $211 increased deployment alone drive down cost and improve billion in 2010, up from $160 billion in 2009. Including performance or does the need to be globally competitive the unreported $15 billion (estimated) invested in solar mandate more active support for innovation? Meanwhile, hot water collectors, total investment exceeded $226 decades of research have examined how innovations emerge in other sectors, what factors improve the odds of success inWORLD RESOURCES INSTITUTE â€˘ September 2011

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Two Degrees of Innovationâ€”How to seize the opportunities in low-carbon power 14innovation processes, and how innovative capacity is energy security, and environmental sustainability. Work onintertwined with economic growth. This literature has not this topic often falls to an energy ministry, but integration withpreviously been applied to the low-carbon power sector, but it economic development ministries is critical to capturing thedoes support a framework for action. Gleaning principles for larger benefits of the growing low-carbon power sector.the newly emerging sector from the existing evidence base for Because this approach is so tightly tied to economicinnovation-led economic development provides a wealth of development, these tools are also broadly useful to thosetools for policymakers. providing technical support or financial support for economic development internationally, such as the multilateralThis paper provides a framework for policymakers to development banks and overseas development agencies.foster innovation in order to seize the opportunities presentedby the global utility-scale power sector transformation, Methodologyhelping to answer the critical question, â€śHow do I in practice We began with a comprehensive literature review to underpinbring home the benefits of low-carbon development and green our efforts to identify why innovation is key to solving thegrowth?â€ť challenges facing the power sector and how policymakers might support innovators. We drew primarily from scholarlyAudience peer-reviewed sources, governmental and trade publications,This paper provides national or regional policymakers with and institutions, such as the OECD, with a long history ofanalytical tools and methodologies to seize this opportunity, research in this area. Identifying and drawing upon seminalmaximize the benefits from their investments, and deliver both articlesâ€”selected through cross-referencing bibliographiesnear- and long-term benefits to their constituents. The scope of and citation searchesâ€”yielded foundational works stretchinganalysis is limited to the low-carbon electricity generation back to the 1930s, beginning with Joseph Schumpeter writingsector (also called the low-carbon power sector), because this on innovation in economic development. More recent worksdelineates a common set of global participants, regulatory covering innovation and its processes, systems, andstructures, and challenges. The supply side of the power sector applications included Chris Freeman, Richard Nelson, Bengt-is not the only priority area of energy in need of Ă…ke Lundvall, Keith Pavitt, and others. Contemporarytransformation though; this framework could be similarly research by others, such as Jorge Niosi and Andrew Van deapplied to the demand side of electricity, to transport and to Ven, supplemented the seminal articles to support theindustrial efficiency. The principles described here are also evaluation, analysis, and interpretation of concepts to bebroadly applicable to the innovation needed to support applied to the low-carbon power sector. Illustrations wereadaptation to a changing climate. Many discussions about drawn from trade press and governmental sources, as well asinnovation principles in climate change mitigation try to academic sources writing on energy policy. This body ofaddress this much broader range of sectors. This paper is more literature encompassed analysis of:narrowly focused in order to provide tools that give enough â€˘ innovation in emerging and mature sectors,specificity to act. â€˘ innovation strategies and economic development in developed, recently developed and emerging economies,This focus on a single sector still incorporates a large and â€˘ product, process, and organizational innovations,diverse audience. Policymakers in both developed and â€˘ local, national, and global innovation processes, andemerging economies are facing similar technical questions and â€˘ successes and failures in innovation policy efforts.political challenges as they grapple with delivering a low-carbon power transformation with limited public budgets and Taken together, this literature drew a comprehensive picture ofprice sensitive consumers. While there are differences in the the current understanding of how innovation is a central driverresources they have to work with, they are driven by similar of economic growth and how it is most effectively fostered.concerns about cost containment, economic development, This understanding of how innovation is best fostered isWORLD RESOURCES INSTITUTE â€˘ September 2011

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Two Degrees of Innovationâ€”How to seize the opportunities in low-carbon power 15particularly powerful in light of the focus on green growth in Improvements in technology and productivity are one of thepolicy circles and the need for innovation in low-carbon three factors that explain growth, alongside increases in capitaltechnologies. and labor. In many countries, total factor productivity (a broad definition of technology usually employed by growthStructure economists) was found to account for more than half of 43The paper opens by reviewing why innovation is critical to long-term economic growth. There is little disagreementmeeting policymakers development, energy, and that innovation is itself a critical ingredient to the economic 44environmental goals. Section two introduces foundational development of any country. For example, the dramaticconcepts about innovation processes and the ecosystem that growth episodes in the so-called Southeast Asian Tigers havesupports innovators. It concludes by detailing what innovation been extensively studied and linked to their successful effortsconcepts can reveal about how the low-carbon power sector to create and foster new sectors through a mix of industrial, 45operates today. Section three introduces a step-by-step process science, technology, and innovation policies.for policymakers who want to invest in innovation in order toseize the opportunities. It describes how to identify The argument that innovation leads to growth is alsoopportunities in the sector, how to assess the current relevant to specific sectors. Fostering innovation in a specificinnovation ecosystem and how to take steps to bolster support sector is often a more manageable task than attempting to dofor innovations. so across the entire economy simultaneously. Even high- 46 capacity nations tend to focus efforts on key sectors.SECTION 1â€”WHY INNOVATE?Policymakers should embrace innovation in the low-carbon The emerging low-carbon power sector has become apower sector for a host of reasons integral to economic priority for many nations pursing development. Countriesdevelopment, energy, and environmental agendas in both like China have explicitly targeted the low-carbon powerdeveloped and developing countries. From efforts to drive sector as a new strategic sector leading economic growth 47economic growth to supplying low-cost electricity, from worldwide. By early 2011, at least 95 countries had enactedcreating new jobs to safeguarding the climate, the potential policy mechanism to support renewable electricity generation, 48benefits derived from investing in low-carbon power sector more than half of which developing countries. This sectorinnovation should not be ignored. has been experiencing impressive growth rates in recent years, 49 with little indication that this rapid expansion is short-lived.Innovation for Economic Growth and Investing in innovation in low-carbon power technologies isDevelopment thus particularly attractive for two reasons: first, because theInnovation is one of the most important drivers of power sector usually forms an important share of a countryâ€™seconomic growth. Schumpeter was the first economist to overall economy, and impinges on nearly all other sectorshighlight that knowledge and innovation are critical to the through energy provision services; and second, because pastevolution of an economy. He remarked that a â€śnew experience suggests that rapidly-growing, technologically-combination of the means of productionâ€ť is â€śthe fundamental advanced sectors have been good targets for policy 39phenomenon of economic developmentâ€ť. Solow was the first interventions aiming to spur a countryâ€™s economicmodern economist to bring technology into neoclassical performance, or â€śleapfroggingâ€ť into sustained international 50economics and show that it has an important role to play in competitiveness. 40long-term growth. Since Solowâ€™s contribution over 50 yearsago, the role of technology and innovation have been Participating in the low-carbon power sector requires 41extensively explored by modern economists, and most agree interaction with global markets, which createsthat improvements in these areas are the main engine to opportunities for significant economic benefits in and of 42 51increases in long-term productivity and economic growth. itself. The larger, international market increases theWORLD RESOURCES INSTITUTE â€˘ September 2011

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Two Degrees of Innovationâ€”How to seize the opportunities in low-carbon power 16opportunities for learning, for access to innovations made Innovation for Expanded, Affordable, andelsewhere, and for additional exports. Developing nations may Reliable Electricity Accessnot have sufficient resources for early-stage research and Expanded Electricity Accessdevelopment, education investment, or competitive innovation Innovation in the low-carbon power sector is necessary to 52strategies to penetrate the global market. Participation in a expand both physical and economic access to electricityglobal energy innovation ecosystem therefore allows for short- and modern energy services. According to the Internationalterm capacity expansion through adoption of the most Energy Agencyâ€™s 2010 World Energy Outlook, the worldâ€™sappropriate technologies available on the global market, which average electrification rate as of 2009 was 78.9 percent,should be adapted to the country context. Over time, countries leaving 1.4 billion people or over 20 percent of the worldâ€™scan develop technologies and processes in the low-carbon population without access to electricity, and consequentlypower sector ideal to their specific local contexts, without access to the benefits of modern energy services such 55incorporating existing indigenous knowledge from other as lighting, refrigeration, and telecommunications.economic sectors (cross-sector transfer or â€śskill switchâ€ť). Thiswould allow them to capture critical links within the global Innovation throughout the entire low-carbon valuesupply chain and expand market share, which increases rates chainâ€”including in renewable energy equipmentof wealth retention and contributes to domestic economic manufacturing, electricity generation, transmission,growth and welfare. 53 dispatching, demand management, and policy and regulationâ€”is key to bringing electricity prices down whileInnovation in the low-carbon power sector also provides improving access and performance (be it reliability,numerous development co-benefits beyond its direct efficiency, safety, quality, or similar criteria). Solving thecontribution to economic growth, such as improvements in: inter-related physical and economic challenges to providingâ€˘ access to education services, modern energy services requires technologies that meetâ€˘ human capital due to training and absorption of know- consumersâ€™ performance needs, avoid damaging the climate, how, and cost the same or less than fossil fuels or traditional energyâ€˘ public health outcomes due to the increased use of clean sources. Innovation is key to fulfilling all of these criteria. fuels,â€˘ government regulatory practices and institutions available Transmission is an ideal example of why innovation is central to other sectors, to providing clean, cheap, and reliable power. Development ofâ€˘ wage levels, low-carbon power from renewable sources like wind and solarâ€˘ trade balances along with shallower economic cycles (in requires that the electricity sector balance both the temporal the case of countries highly dependent on imports of variability and the geographic mismatch of renewable energy fossil fuels and their price fluctuations in international generation and large-scale electricity demand. markets), andâ€˘ access to energy resources. Both technical and systems innovationsâ€”for example ultra high-voltage transmission lines, real-time dispatching,In turn, these development co-benefits help to increase renewable resource forecasting, large-scale electricity storage,economic and political performance and stability, augmenting and demand side managementâ€”are needed for low-carboninvestor confidence and leading to increases in foreign direct producers to contribute their power to the grid and to ensure 56investment. This brings additional resources to the country and the provision of sustainable and reliable power.may enhance knowledge and technology spillovers, creating a Energy Securityvirtuous cycle that feeds back into innovation processes across 54 Policymakers strive to consistently deliver affordablethe economy. 57 electricity as a central ingredient for economic development.WORLD RESOURCES INSTITUTE â€˘ September 2011

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Two Degrees of Innovationâ€”How to seize the opportunities in low-carbon power 17They also strive to keep prices relatively stable. High or to limit climate change to 2Â°C of average global warming 65volatile energy prices have led to civil unrest and to the above pre-industrial levels. While groups of nations and 58downfall of elected government officials in developed and individual countries are taking action, such as the European 59developing countries. The economic effects from such Unionâ€™s commitment to reduce its emissions to at least 20 66delivery and price disruptions can have broad impacts, percent below 1990 levels by 2020 , summed together, 67affecting household-level consumers, a countryâ€™s countriesâ€™ declared first steps still are not enough. Â macroeconomic activity, and foreign exchange balances.Innovation can improve both economic and physicalenergy security by reducing supply vulnerabilities and Box 1 | Making Low-Carbon Power Economically Competitivelimiting price volatility in two crucial ways. First,innovation can help increase the efficiency of electricitygeneration, regardless of fuel type. More efficient plants There are several ways to make low-carbon energyrequire less fuel to meet the same demand, reducing exposure technologies cost competitive with high-carbon options in orderto supply disruptions and price volatility. to enable the power sector transition. The first strategy is to increase the cost of the high-carbon options. This can be done by removing or reforming subsidies for fossil fuel energy, asSecond, innovation can increase the share of electricity discussed by the G20 in 2010.68 It can also be done byproduced from renewable sources relative to fossil fuels. By including diffuse costs, like health impacts and climate change,relying less on fossil fuel sources, whose prices are often associated with high-carbon options in the cost of the power. A carbon tax or carbon-trading schemes, like the Europeandriven by global market forces, and more on renewable energy Union Emissions Trading Scheme, are familiar. Regulation thatsources, which have little or no fuel costs, the power sector tries to limit pollution to economically efficient levels under acan increase the stability of electricity prices. Moreover, if the cost/benefit analysis is also an option.renewable resources are available domestically, physical Raising the cost of high-carbon options would make it easierenergy security can also be increased. for low-carbon options to economically compete, particularly technologies like carbon capture and storage, which will neverInnovation that increases reliance on renewable energy can be able to compete with unregulated high-carbon technologies.also help countries hedge against medium- and long-term But higher electricity prices are politically difficult, even if they are justifiable in terms of long-term environmental and socialfuture fossil fuel price increases. Over time, the price of benefits. Countries worry that they will undermine therenewable energy technologies, such as solar panels, is international competitiveness of export industries, will drive 60expected to decline, and the price of conventional fossil-fuel- energy intensive industries to unregulated economies, and will 61generated electricity will likely continue to rise. India, for dampen economic growth.example, is embracing solar energy as an imperative to protect The second strategy is to drive down the cost of low-carbonitself from higher dependency on imported coal and the related options by investing in innovation. In the case of CCS, this 62cost of developing import infrastructure. The Philippines is limits the overall electricity price increase needed to addresssimilarly using renewable energy investments to hedge against carbon pollution. With other technologies, like wind power, 63 innovation could lead to undercutting high-carbon optionsrising fossil fuel prices. altogether.Innovation for Climate and the Environment The two approaches are complimentary and reinforce eachMeeting the Climate Challenge Â other in trying to reach cost competitiveness. In the currentIn the face of clear and robust scientific evidence of global economic climate, strategies that reduce energy costs while reducing environmental impacts and creating development co-warming and its anthropogenic causes, the primary policy 64 benefits, as innovation does, may be easier for policymakers toresponse is a reduction in greenhouse gas (GHG) emissions. implement.The international community now broadly agrees on the needWORLD RESOURCES INSTITUTE â€˘ September 2011

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Two Degrees of Innovationâ€”How to seize the opportunities in low-carbon power 18Peaking of atmospheric CO2 concentrations in time to limit Environmental preservation has a temporal dimension:warming to 2Â°C will be virtually impossible without sustainability. One crucial element is the conservation of 69accelerated clean technology innovation. Wind turbines need natural resources for future generations. Such naturalto capture more energy. Solar cells need to be more efficient. resources can include biodiversity, energy and mineralGeothermal technology needs to be further adopted. Carbon resources, forests, and entire ecosystems (and the services theydioxide capture and storage (CCS) needs more efficient provide). Innovation today is necessary to reduce the low-capture technologies that ensure safe and permanent storage. carbon power sectorâ€™s environmental footprint to helpThe costs of all these technologies need to fall. Innovation is ensure these natural resources are sustainably managedcrucial to lower the cost and increase the adoption of low- and available for future generations.carbon energy resources, thereby helping mitigate climatechange. Can Innovation Deliver? Can innovation really deliver a big enough change in the low-Environmental Preservation carbon power sector to meet the climate and energy accessHowever, low-carbon technologies are not themselves free of challenges policymakers face? As seen in Figure 1: Solarenvironmental impacts. Innovation is necessary to reduce Panel Cost and Area Changes and Figure 2 Wind Turbine Costthe power sectorâ€™s impact on people and ecosystems, and Scale Changes, successful innovations in materials,including the negative environmental impacts associated with production processes, logistics, and other steps in the valuethe scale-up of low-carbon power technologies. Three chain underpin dramatic changes in cost and performance. Theimportant performance criteria are efficiency, safety, and figures also highlight how low experts project innovationefficacy: could drive costs in the future.1. Efficiency improvements in low-carbon power generation reduce the amount of natural resource inputs that are Innovation has not always happened at the breakneck pace needed to generate a unit of electricity output. Efficient seen in the twentieth century, and innovation in energy has resource use and management is key to reducing pressure 70 often been painfully slow. Nicholas Stern warns, the cost of on the environment. For example, innovation that actions to mitigate climate change â€świll be higher if improves the efficiency of photovoltaic panels reduces the innovation in low-carbon technologies is slower than amount of land surface that is necessary for utility-scale 71 expectedâ€ť. It should not be assumed that innovation would solar-powered electricity generation. Innovation in happen fast enough to address the urgent challenges without second-generation cellulosic ethanol reduces the amount support from policymakers. of arable land, water, and fertilizer otherwise needed to grow crop biofuels.2. Safety and quality improvements can facilitate the acceptance of renewable energy technologies, particularly in populated areas, and help ensure people and ecosystems are protected and risks are mitigated. For example, innovation that strengthens wind turbines to better withstand strong winds and extends their lifespan increases their safety and acceptability for onshore wind farms near human populations.3. Efficacy is also critical to ensure that low-carbon power generation has the desired impact on the climate. Net GHG emissions must be reduced over the lifecycle of any given low-carbon power technology.WORLD RESOURCES INSTITUTE â€˘ September 2011

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Two Degrees of Innovationâ€”How to seize the opportunities in low-carbon power 19Figure 1 | Solar Panel Cost and Area ChangesTo achieve a 50 percent reduction in greenhouse gas emissions by 2050 (compared to 2005 levels) the IEA estimates that 3,155 GWof photovoltaic capacity will be required by 2050, enough to provide 11 percent of global electricity production. Over time,innovations have made reaching this target easier. Innovations like new materials and improved methods of production, includingimprovements through learning-by-doing and finding economies of scale, have made solar photovoltaic cells significantly cheaper andmore efficient between 1982 and 2008. While many factorsâ€”such as commodity pricesâ€”also impact costs, future innovations can 72continue to improve solar cells pushing toward a competitive cost of equipment, estimated to be US$.50/W.WORLD RESOURCES INSTITUTE â€˘ September 2011

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Two Degrees of Innovationâ€”How to seize the opportunities in low-carbon power 20Figure 2 | Wind Turbine Cost and Scale ChangesTo achieve a 50 percent reduction in greenhouse gas emissions by 2050 (compared to 2005 levels) the IEA estimates that 2,000 GWof installed wind capacity will be required by 2050, enough to provide 12 percent of global electricity production. Over time,innovations have made reaching this target easier. Between 1985 and 2010, innovations like new materials and improved methods ofproduction, including improvements through learning-by-doing and finding economies of scale, have made wind turbines morecapable and their electricity cheaper. While many factorsâ€”such as commodity pricesâ€”also impact costs, future innovations cancontinue to improve wind turbines and farms pushing toward a competitive position in electricity markets, estimated to be 73US$.069/kWh levelized cost of electricity.WORLD RESOURCES INSTITUTE â€˘ September 2011